I can’t understand why you’d be mucking about generating mediocre returns with puts and calls when you could be putting your capital to work on good investments. While this may be a workable strategy (on paper anyway), why on earth are you doing it?
Hi Brittlerock, I’ve often asked myself the same question (why would they do it?), but some people apparently love it. Different people, different tastes.
Saul
Hi Brittlerock,
I think Saul already hit the nail on the head, but just to add to it - some people really appreciate consistency and predictability. Most of the companies that just plug away (while generating mediocre returns) have been around for 20 to 50 years, or more. There is a high degree of confidence that these companies aren’t going anywhere.
In an attempt to make lemon aid out of lemons, those option strategies I mentioned can really make a difference for someone who is just looking to play it safe and generate some income in the process. It works and doesn’t take a great deal of thinking. The high growth, high beta stocks just give a conservative investors a lot more heartburn.
I will add one more thought for consideration. You could actually play it both ways - a base set of core stalwart stocks that are used as leverage for options on high growth securities. Here’s what I mean:
Suppose you had roughly 50% of your portfolio in these stalwart stocks. You’re generating 5-8% on them through the income generating strategies. And you have a good deal of confidence they’re not likely to move much in either direction in a bear or bull market. If your alternative is having 50% of your portfolio rest in cash, this is probably a better option. That brings me to the next part.
I do a lot of leveraging in my account. Roughly 50% of my portfolio are option strategies (and probably more due to the recent run up). Rather than having the money to back my strategy in cash, I choose to use a core base of stocks that are relatively “safe” as the alternative and the online brokers are fine with that (they’ll just sell them for you if things get really bad and you’re running low on margin :). In this way, you could seek the outsized gains through options AND have your “backing capital” working for you at the same time. This is the strategy I currently use, and as of yesterday I’m back over 80% YTD.
Hopefully this makes some sense.
Best,
–Kevin
And you have a good deal of confidence they’re not likely to move much in either direction in a bear or bull market
Kevin, can you give some examples of companies that don’t fall in bear markets?
Neil
Hah! Neil, no, I cannot. Virtually all go down in a bear market, but some may move sideways through a bear market rather than take on a full plummet. It really comes down to finding your favorite “safe” (low beta, low PE) and “risker” (high beta, high PE?) stocks and building a strategy around each.
Of course, I make no guarantees - only ideas - but below are some stocks I’ve used for the “safer” side of the house:
COST, MKL, AAPL, NTES, BRK.B, AMT, HAIN, ORLY, UNH, SAM, SBUX, MA, WFC, AFSI, BOFI
I fully realize these are not impenetrable stocks and expect they will go down in a bear market, but, I don’t expect them to fall by nearly as much as some of my others. It’s all relative 
Best,
–Kevin
Neil,
Thank you for putting into words the uneasy feelings I have begun to get after writing my first put on a company I would really like to own, but not quite at today’s price. The put is in a ROTH account so taxes do not play, but missing the up side surly does!!